Vanguard’s First Active ETF In Sight

September 30, 2013

The long wait for an active ETF from Vanguard may be over soon.

It’s quite common these days to hear that active ETFs will be the Next Big Thing in the world of investments, but Vanguard is the last company you hear mentioned when it comes to leaders of that trend. After all, Vanguard—successful as its exchange-traded funds now are—hasn’t exactly been a trailblazer in the world of ETFs. Moreover, it’s known as an indexing shop more than an active manager.

But it put an active mutual fund focused on global low-volatility stocks into registration last week that could easily become an ETF—and one that could well get attention from investors. A few steps are missing before an ETF version can be created, but Vanguard has said it intends to offer active ETFs, and this strategy has a great chance of being Vanguard’s first. Here’s why.

The Vanguard Global Minimum Volatility Fund almost has a trendy ring to it, which is amazing when you consider how much the company John Bogle founded sticks to its knitting in terms of low-cost, capitalization-weighted indexing strategies.

Low-volatility equity ETFs have taken off in a big way over the past two years, fueled by anxiety about all the macroeconomic uncertainty in the wake of the financial crisis and the rancor in Washington, D.C. Some also see low-volatility strategies having a permanent place in investment portfolios.

The segment has garnered more than $10 billion in assets under management in such funds as the $4.3 billion PowerShares S&P 500 Low Volatility Portfolio (SPLV | A-44) and the $2 billion iShares MSCI USA Minimum Volatility ETF (USMV | A-55).

Crucially, successful ETFs like SPLV and USMV are all index strategies, which leads us to why Vanguard would approach this low-volatility pocket of the investment universe with an actively management fund.

To those not completely familiar with Vanguard’s views on the matter, its position is that any index that isn’t capitalization-weighted is, by definition, an active strategy, whether it’s rules-based on not.

So the Vanguard Global Minimum Volatility Fund that will go live sometime in the fourth quarter will be an active strategy.

Still, Vanguard stands apart in the realm of active-fund management. The company brings the same systematic focus on lowering costs to its active strategies, turning on its head the notion that active management has to be a lot more expensive than passive strategies.

So-called Admiral shares of the new Vanguard minimum volatility mutual fund—which often have the same price as ETF versions of the same fund at Vanguard—will come in with an annual expense ratio of 0.20 percent, or $20 for each $10,000 invested. That’s smack in the middle of SPLV at 0.25 percent and USMV at 0.15 percent.



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